Japan PM changes cabinet but rough road ahead

Tokyo: Japan’s prime minister appointed a fiscal hawk to a key post and replaced his deputy in a cabinet revamp on Friday to cope with a divided parliament and tackle reforms to rein in public debt, but hurdles to success are high.

Drafting Kaoru Yosano, an advocate of raising the 5% sales tax, as economics minister signals Prime Minister Naoto Kan is serious about reforms needed to fund bulging social welfare costs and rein in the huge public debt, as well as about trade liberalisation sought by business but opposed by farm lobbies.

But with opposition parties able to block bills in the upper house of parliament, Kan’s own Democratic Party of Japan (DPJ) split over the sales tax and free trade and the new cabinet not necessarily united, scepticism over prospects for progress ran deep.

Appointing Yosano would “give an impression that Japan’s fiscal and tax reform will progress, led by the finance ministry. And this will probably ease concerns to some degree about supply and demand in the bond market,” said Akitsugu Bandou, a senior economist at Okasan Securities.

“But the government will continue to face a severe situation because of political deadlock, and the cabinet reshuffle is not necessarily going to change the situation that the DPJ lacks political power,” Bandou said.

Replacing Yoshito Sengoku with Edano clears the path for debate on the state budget for the year from April, but it is unclear if Kan can find enough votes to pass enabling laws.

UP TO THE JOB?

“The ruling party has to pass the budget first. We can only begin thinking of the market implications of the reshuffle when the ruling party is running parliament smoothly,” said Hidenori Suezawa, chief strategist at Nikko Cordial Securities.

Kan has also sought multi-party talks on tax and social welfare reform with an eye to outlining changes by June, but opposition parties say they want to see DPJ proposals first.

Some analysts worry that the 46-year-old Edano, who made his name in a former cabinet post in charge of cutting waste, may not be up to the demands of his new job.

“He can be an easy target (for opposition parties) because of a tendency to straight-talk but also to committing gaffes and offending people unnecessarily,” said Sophia University professor Koichi Nakano.

Opposition parties had threatened to boycott debate on the budget for 2011/12, starting on April 1, unless Sengoku and Transport Minister Sumio Mabuchi, censured by the upper house in November for their handling of a row with China, were sacked.

The government can enact the budget because the DPJ controls the powerful lower house, but the opposition can block bills needed to implement the spending in the upper chamber.

Edano has also been a critic of DPJ powerbroker Ichiro Ozawa and his appointment could deepen a rift in the party over the veteran strategist, who faces indictment over a funding scandal.

Many Ozawa backers oppose a sales tax rise as well as the free trade deals Kan wants to pursue.

Yosano, who held key posts in Liberal Democratic Party (LDP) governments before the conservative party was ousted by the Democrats in 2009, bolted the LDP last year to set up the tiny Sunrise Party. He is leaving that party to join the cabinet.

Private economists largely agree that raising the sales tax is essential but many lawmakers fear angering voters, especially ahead of local polls in April.

“The bigger picture is that they (the ruling party) will lose big time in the April elections and that is when the knives will come out for Kan,” said Jesper Koll, director of equity research at JPMorgan Securities Japan.

Kan, who took over as Japan’s fifth premier since 2006 last June, led his party to defeat in an upper house poll a month later after clumsily floating a possible rise in the sales tax.

He has since seen his support rates more than halved from the 60 percent or higher he enjoyed initially.